Update: 2/27 – US Government takes 36% stake in Citi, converting $25 billion in preferred stock into common stock. Citigroup also says it will suspend its common and preferred stock dividend. Read the Full Article.

Uh Ohh…

NEW YORKCitigroup Inc. (C) is in talks that could see the U.S. government take a bigger stake in the beleaguered bank, according to reports.

The Wall Street Journal said taxpayers could own as much as 40 percent of the ailing lender’s common stock. Citing sources familiar with the talks, the newspaper also said Citigroup executives hope discussions with U.S. officials will result in a government stake closer to 25 percent.

The US government already holds a 7.8% stake in Citigroup, via warrants for the received as collateral for the massive $45 billion loan and guarantees issued to the company. Citi is currently in negotiations with US officials on a scenario under which a “substantial portion” of the $45 billion will be converted into common stock.

The plan would not cost further taxpayer money, but other Citigroup shareholders would see their stakes diluted and the government would have much larger influence over Citigroup.

The New York Times reported the plan being contemplated at Citigroup could pave the way for similar moves at other big banks.

Sucks for the shareholders’ of Citi….and a word of warning for those holding B of A and the like. You might be next.